This video introduces you to the ABC's of impact and the concept of impact classes. A way of allowing investors around the world to group investments with similar impact characteristics. Classifying the impact of investments is an essential step to defining contribution to the SDGs. The realm of measuring and managing non-financial impacts has been around for decades and encompasses more than a dozen acronyms that describe the various screening ratings, standards, certification, and reporting systems. ESG, GRI, PRI, SASB, and SRI are just a few of them, but the list is long. Understandably, both enterprises and investors often want help navigating this alphabet too. So many systems can make it hard for investors who own or manage many assets to compare investments without having to dive deeply into each individual investment. It's especially hard to compare public and private market investments by impact since they generally use different systems. It would be easier if each investment came with an agreed on label that would allow a pension fund manager like Paula or a fund manager like Akhil to know what level of impact the funder enterprise is targeting. That's what impact classes are, a common label for intentions around impact. A bit like asset classes, which group investments that share similar financial risk and return characteristics. Impact classes are labels that allow investors to group and compare investments that share some overall salient impact characteristics. Like asset classes, using impact classes doesn't assure you that certain performance will be achieved. But it does tell you about the intention of the investment based on underlying characteristics. Why use impact classes? No matter what the industry, vehicle stage, or asset class, all investments can be classified using their underlying five impact dimensions. Once classified, investors can use the classifications to assess their existing assets, reveal gaps, set goals for future investment, and evaluate and report on impact performance. I like to call impact classes the Rosetta Stone of investing for impact. There are many different languages around impact being spoken. But once you classify an individual investment, anyone else reading that label can know what it intends to do and judge its impact performance more easily. For investors wanting to convey that their investments are contributing to the SDGs, impact classes are becoming an essential label. In fact, the UN SDG impacts standards include classifying your investments by goal as part of the recommended assurance process. I'm going to introduce the overall framework of impact classification, so you understand the basics and then show you an example of using a classification map to set goals. We'll cover more about how to classify individual enterprises and investment portfolios elsewhere. Investments impact class is a function of two things. The impact of the asset or enterprise on the x-axis and investor contribution on the y-axis. We'll start with the x-axis. The investment may A act to avoid harm, B create benefit for stakeholders, or C, contribute to solutions. Of course, it might instead actually cause harm, in which case it would not receive an impact classification. The ABC framework is not intended to replace the current terminology preferred by the market. Negatively screened investments might reject companies that do overall harm to people and the planet or are unrated by the ABC framework. Investments that integrate ESG factors to start to avoid or reduce some of their harmful impact can fall into the A category. Investments that are working to create positive benefits for stakeholders, such as thematic investments in specific solution areas would fall into the B category. Investments working toward a measurable outcome for which the population or environment is currently under-served would be in the C category. Ultimately, the A, B, or C goal is affirmed by the underlying dimensions of the investment. An enterprise can evaluate those underlying dimensions and label itself as an A, B, or C, or investors can analyze those underlying dimensions and apply a label. As you'll see, an A, B, or C investment provides certain kinds of information about the impact to earn the appropriate label. For example, earning a C label usually requires evidence of substantial contribution to an outcome for which the population is currently under-served. Also, the ABC framework is not a value judgment. Classification is not about the race to see, even as most investors can do more to maximize the impact potential of their specific strategies. Large companies can create significant impact at scale by avoiding harm. What matters is an investor's ability to accurately discern and describe the full scope of its positive and negative impacts across the ABC continuum. The y-axis communicates the level of investor contribution, the extent to which the investor takes actions to enable greater impact. The actions and investor can take include signaling that impact matters, engaging actively in the impact of the investment, growing new or under-supplied markets, and using flexible capital to enhance impact. With all the possible combinations of these actions, there are six levels of investor contribution. Now let's return to the impact class matrix. The combination of six levels of investor contribution and three impact goals makes 18 possible intersections. Several intersections don't usually occur, so we end up with 13 possible impact classes from A1 - C6. Note that impact classes are not ratings or rankings. Each one is just as worthy as another and A1 is not better than B2. Just as with asset classes, a private debt investment isn't better than a public equity investment. They're just clusters of investments that share certain characteristics. But investments within each cluster can be more easily compared with each other. There will be higher performers and lower performers in each. By performance, I'm talking about impact performance, whether they met their impact goals. Some also ask if there's a way to classify impact by financial performance as well and I'm going to answer that while that is generally complicated, there is one part of the matrix that does begin to refer to financial targets. That's what an investor targets a return that's below a risk adjusted market rate return. That's the definition of the highest level of contribution using flexible capital to enhance impact. Investors that use flexible, lower return based capital would put those investments in the last two rows of the classification matrix. If an investment is located there, you know that they are not targeting a market rate return. We usually add a line to the classification matrix to mark the distinction between market rate contribution levels 1-4 and the below market rate targets in contribution levels five and six. Impact class also includes some information about the return the specific investment is targeting as part of the classification. Now that you understand the framework, I want to share an example of a portfolio classified by impact. PGGM is a Dutch asset manager with over €220 billion of assets under management. They map their portfolio by impact class in 2018, by percent of the portfolio. This is how it came out. What do you notice about the distribution of assets across the impact classes? Pause the video here and look for a minute. You might have noticed that 50 percent of their assets are in A1, the intersection of avoiding harm and signaling, which is the most passive form of investor contribution and just two percent of their assets are in the C column. This means that only 2 percent of their investments are aiming to have measurable impact on SDGs and other tangible outcomes for under-served populations. It's not surprising that raising the percentage of C Investments became a goal for PGGM as a result of this mapping. You might also have noticed that none of their portfolio is below the market rate line. This is because the pension funds they work with are targeting market rate returns. If you were to add up all the boxes, you would also notice they don't add up to 100 percent. That's because PGGM decided that 12 percent of their investments actually cause harm. You can see how PGGM use this impact classification map to set several new goals about how to change their allocation targets around investing for impact. Now you've seen how impact classifications can help you map your holdings and set new goals. But classifications are only useful if they are accurate. In other lessons, we demonstrate how enterprises and investors can classify their work first to set goals, and later to assess and manage performance.
